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The Union Budget announced that ULIPs with premiums below Rs 2.5 lakh will continue to remain tax-exempt under Section 10(10D). However, those exceeding Rs 2.5 lakh are taxed as capital gains under Section 112A
ULIPs held for more than 12 months will be taxed at 12.5% as long-term capital gains. (Representative/Shutterstock)
A significant change has been introduced in the Union Budget concerning the taxation of Unit-Linked Insurance Plans (ULIPs). Under the new regulations, ULIPs with annual premiums exceeding Rs 2.5 lakh will be classified as capital assets, subjecting them to capital gains tax.
Currently, profits from some ULIPs are taxed according to the investor’s tax bracket. As per current provisions, if the annual premium for a policy exceeds Rs 2.5 lakh, it is classified as a capital asset. However, this rule does not apply to policies where the premium is less than or equal to 10 per cent of the sum assured.
The government has announced that ULIPs not currently eligible for tax exemption under Section 10(10D) of the Income Tax Act will now be regarded as capital assets and capital gains tax will be levied on the profits from these policies.
ULIPs with premiums less than Rs 2.5 lakh will continue to be exempt from tax under Section 10(10D). However, ULIPs with premiums exceeding Rs 2.5 lakh will be considered capital gains and taxed under Section 112A.
Confusion Over Maturity Proceeds Of ULIPs
The Union Budget 2023-24 has clarified on the tax treatment of maturity proceeds from Unit-Linked Insurance Plans (ULIPs). Previously, there was ambiguity surrounded the taxation of these proceeds. Union Finance Minister Nirmala Sitharaman has addressed this uncertainty, stipulating that ULIP maturity benefits that are not exempt under Section 10(10D) of the Income Tax Act will be classified as capital assets. Consequently, these ULIPs will be categorised as equity-oriented funds for taxation purposes.
Why Did The Rule Change
A large part of the premium in ULIPs is invested in the stock market. Previously, these plans received tax exemptions like traditional insurance policies. However, they have now been brought under the tax net similar to equity-oriented funds. Experts argue that ULIPs cannot be classified in the same way as traditional insurance policies.
How Much Capital Gains Tax Will Have To Be Paid
The Union Budget clarifies that profits generated from redeeming (withdrawing from) ULIP policies with premiums exceeding Rs 2.5 lakh will be considered capital gain and taxed accordingly. ULIPs held for less than 12 months will incur a 20% short-term capital gains (STCG) tax. Conversely, ULIPs held for more than 12 months will be taxed at 12.5% as long-term capital gains (LTCG).
